Bright School is a private school operating as a NFP with a fiscal year end of December 31, 20X8. Bright School has an endowment fund and an operating fund. Earnings of the endowment fund can only be used to provide scholarships to students in need during the year. In any year that the full earnings are not paid out in scholarships, they may be carried forward and used in future years. Scholarships are paid from the operating fund. During the year, the following transactions occurred:
1. The endowment fund earned interest income of $40,000. Only $30,000 was paid out in scholarships in the current year.
2. An additional endowment contribution was received of $750,000 at the end of the year. In this case, earnings on this endowment can only be used to purchase equipment for the science labs in the school.
3. A pledge for an endowment for $350,000 was received in October, 20X8. This arose on the death of a long-time donor who made provisions in their will to leave to the school this endowment contribution. The lawyer handling the estate stated that the funds would be released in early February 20X9 once all of the legal requirements pertaining to the estate had been completed.
Required:
Prepare the journal entries to record the above transactions for the fiscal year-end December 31, 20X8. Bright School uses the deferral method of reporting.

Question

Prakhar Gupta · Accepted Answer

Final Answer :

The following entries would be made in the operating fund:

40,000\begin{array}{llr} \text {Cash } &40,000\\ \text { Deferred revenue } &&40,000\\\end{array}

30,000\begin{array}{llr} \text { Scholarship expense } &30,000\\ \text {Cash } &&30,000\\\end{array}

30,000\begin{array} { ll } \text { Deferred revenue }&30,000 \\\text { Scholarship revenue }&&30,000\end{array}

balance-endowment750,000\begin{array}{llr} \text { Cash } &750,000\\ \text { Net assets - Fund balance-endowment} &&750,000\\\end{array}

Generally a pledge can only be recognized as a receivable if the amount can be reasonably estimated and the ultimate collection is assured. In this case, the endowment contribution has been legally documented in the will and the lawyer has stated that the funds will be released in February. It appears that both criteria have been met and Bright could record the receivable at December 31, 20X8. However, pledges are not normally recognized. In this case, an argument for recognizing the pledge on receipt is that there would not be any interest earned on the principal until after actual receipt. By recording this amount early in the books, users may expect a full year's worth of income to be received in the coming year and may question why this is not the case.
If the amount is not recognized, disclosure of the pledge could be included in the statements.
If it is decided to record the pledge, the following entry would be made:

350,000\begin{array}{llr} \text { Pledge-receivable } &350,000\\ \text { Net assets - Find balance -endowment } &&350,000\\\end{array}

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